Business and Personal Finance Dictionary

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 

• COMPOUND INTEREST
  
  When the interest you earn on an investment is added to form the new base on which future interest accumulates, it is said to be compound interest. Without compounding, you earn simple interest, and your investment doesn't grow as quickly. For example, if you earn 10% compounded interest on $100 every year for five years, you'll have $110 after one year, $121 after two years, $133.10 after three years, and $161.05 after five years for total growth of 61.1% on your investment. With simple interest, you would have earned $10 a year for five years, for $150, or 50% growth. The $11.05 difference is the effect of compounding. Compound interest earnings are reported as annual percentage yield (APY), though the compounding can be figured annually, monthly, or daily. Compound interest vs. Simple interest Compound Simple -------------------------------------------------------------------------------- Start $100.00 $100.00 -------------------------------------------------------------------------------- After 1 year $110.00 $110.00 After 2 years 121.00 120.00 After 3 years 133.10 130.00 After 5 years 161.05 150.00 -------------------------------------------------------------------------------- Growth rate 61.1% 50%
  
  Back